Refinancing is a long, arduous, costly process. Lenders must consider a number of financial variables, from the borrower’s income and assets to credit score, debt, and property value. If a borrower’s loan-to-value ratio, which is based on a current appraisal, does not fall within an institution’s lending guidelines, then it is unlikely that borrower will be able to refinance.
Even when all the loan variables indicate a sound loan, refinancing fees such as an application fee, a loan origination fee, and an appraisal fee can quickly amount to 3% to 6% of the outstanding principal. Refinancing can be a headache, but in many cases it is necessary to secure the best mortgage rates in the market.
Star One Credit Union ($6.30B, Sunnyvale, CA) is giving members access to lower rates through its quick and easy real estate rate modification program. Instead of submitting a time-consuming and costly application for refinance, members can lower their interest rate and payment on an existing Star One mortgage. With the modification, the member pays the new rate on the remaining term and principal balance as opposed to starting over with a new loan, as is the case in a refinance.
“They don’t have to go through an appraisal, they don’t have to get a credit report, they don’t have to wait,” says Kevin Collins, senior vice president of loan services at Star One Credit Union. “Members complete a request, sign a two-page form, and get the rate in a few days versus having to go through all of the difficulty of a refinance. It’s totally convenient for the member.”
Star One conducts a number of surveys on its products and services, and its loan modification gets the highest ratings on the surveys.
“Members love it because it’s easy,” says Collins. “If you’ve gone through refinances before, you’re like ‘Is that it?’”
The credit union’s modification program builds member loyalty, and although the rates are not always the lowest in the market, the convenience of the program provides other incentives that keep members with the credit union.
“The industry here is churning,” Collins says. “You make a loan and somebody steals it from you. That’s been our experience for the past four years. With our modification program, we can keep a lot of those loans because members are loyal to the program. Even if there is a lower rate somewhere else, it’s probably not worth it to them to leave the credit union.”
In addition to member convenience, the program saves time and paperwork for the credit union. In 2012, Star One granted 1,400 first mortgages and completed 3,214 modifications. If those modifications had been refinances, the underwriting would have been an impossible burden on the credit union’s staff. Without the modification program, members waiting for the credit union to process their refinance application would likely have left Star One in favor of a more timely process at another financial institution.
Get With The Program
The success of the modification program is in its simplicity. The credit union does not require a lengthy application; instead, members complete a succinct request form that asks for their current loan rate, current loan product, and desired loan product. Star One charges a modification fee of 0.5% of the outstanding loan balance with a minimum of $750 and a maximum of $1,500. The cost is similar to what a member would pay to refinance with a third party.
“If they refinance, they probably would pay out of pocket a similar amount, but it would have gone to the title companies and the appraisers instead of the credit union,” Collins says.
Star One also allows members who are underwater on their home to modify their Star One loan. These members do not quality to refinance in the secondary market, but they can access a lower rate through a Star One modification.
“There’s no additional risk for us,” Collins says. “We already have the loan, so we’re underwater whether we do the modification or not. The member just has to be current.”
Once the member submits a request, the credit union amortizes and rewrites the loan. Star One does not extend loan terms, for example it does not allow members to go from a 15-year mortgage to 30-year mortgage, but its online rate tracker allows members to stay up-to-date on interest rates so they can decide when its time to modify.
“Members will go on our website and track the rates,” Collins says. “They will say ‘let me know when the rate gets to X.’ People are constantly monitoring the rates.”
Today’s low rates are driving a high volume of modification requests, so Star One has cross-trained people from branches and other departments to handle the modification load.
“It can be busy and then not be busy, so you can’t staff for this kind of thing,” Collins says. “You have to prepare internally through cross-training.”
Not For Every Institution
The modification program works for Star One because the credit union borrows to hedge its real estate risk. For credit unions that regularly sell loans to the secondary market, modifications would not be appropriate.
“Once there’s a rate out there to an investor, that’s the rate,” Collins says. “The investor wouldn’t want the rates to go down in the market, so it’s not for everybody.”
Although Star One holds most of its mortgages, it does sell a portion of its portfolio. Those members are then ineligible for a modification, which can be a source of frustration. To make up for the inconvenience, Star One pays the appraisal fee for members who want to modify but whose loans were sold.
The strategy is a way to combat negative perception of the credit union, Collins says. It also gives all members equal access to lower rates, which contributes to member loyalty and a strong financial footing in the California market.